Nepal Rastra Bank – the central regulatory and monetary authority – has made several reforms to create a more favourable ground for private investments including foreign direct investment (FDI). Foreign Exchange Facilitation Unit under One Stop Service Centre (OSSC) has been set up at the central bank in order to provide foreign exchange facility to investors. This unit performs its operations as guided by NRB Foreign Investment and Foreign Loan Management Bylaw, 2021 (FIFL) (Second Amendment).
The FIFL Bylaw, 2021 has provided different facilities to FDI. Along with the enforcement of the bylaw, obtaining prior approval is not required to bring in foreign currency for feasibility studies and pre-operating expenses. Further, NRB can record up to 3% of such expenses as foreign investment capital.
The waiver of prior approval from NRB to bring foreign currency in Greenfield Investments (Pre-notification to NRB is adequate to remit convertible foreign currency) has been provided in order to facilitate FDI and unlock Nepal’s investment potential.
In addition, the central bank has provided assurance of timely service delivery. Time limit has been set for every approval to be provided from Nepal Rastra Bank. Along with this, necessary authority has been delegated to the unit in-charge of foreign exchange facilitation. Sixty-three percent of decisions were made through the unit in the last Fiscal Year 2022/23, and this has shown that the independent and transparent decision-making process will prevail in the coming days. This will substantially cut procedural delays as there is no requirement to wait for decisions based on horizontal hierarchy.
On top of that there is a provision of investment ratification and recording with NRB. This provision facilitates investors to record those foreign investments that had obtained approval from DOI (full form please) only without taking prior approval from NRB.
Foreign Loans
The Foreign Investment and Technology Transfer Act (FITTA), 2019 has excluded foreign loans from the definition of foreign investment. The FIFL Bylaw 2021 has included a provision allowing foreign loans in sectors which have been opened for FDI by FITTA, 2019.
Investors, other than FDI industries, now require only the approval of Nepal Rastra Bank to bring in foreign loans. Once the foreign loan has been recorded and the repayment schedule approved by NRB, there is no further NRB approval required to repay the loan principal and interest amount. On the other hand, the provision of bringing foreign loans up to the limit of equity from the parent company by amending the earlier provision which allowed bringing foreign loans up to only 60% of the equity is expected to help companies to mobilise adequate resources from foreign loans.
Further, there are provisions of payment of penal interest, prepayment fee and commitment fee in case of loan from foreign banks and financial institutions as well as bringing foreign loans from foreign individuals, foreign companies and foreign banks and financial institutions. However, the foreign loan must be denominated in Nepali currency, i.e., NPR.
FDI and Foreign Loan Facilitation
The Foreign Investment and Loan Facilitation Committee is chaired by the deputy governor in order to coordinate among the related agencies regarding FDI issues. System development process has been initiated so as to automate the functions of Foreign Exchange Facilitation unit for efficient service delivery. This will enable investors to make online application regarding pre-notification, approval, recording and repatriation and save them from the hassle of visiting the unit physically.
NRB Bylaws will be amended to address automatic route once the provision comes into implementation as per the Ministry of Industry, Commerce and Supplies gazette notification on October 2 last year.
Future Initiatives
As mentioned in the Monetary Policy for current Fiscal Year 2023-24, Nepal Rastra Bank is revising the ‘NRB Foreign Investment and Foreign Loan Management Bylaws, 2078’, including the programmes mentioned in the budget for the current fiscal year.
Some of the future initiatives being considered are as follows:
- Relaxation in approval from NRB for some brownfield investment projects (such as in listed companies, sick industries, etc.).
- Providing additional time for regularisation of foreign investment and foreign loans, in case they have missed to record, to provide prior information, or to take approval within the required deadline.
- Possibility of bringing in excess funds than the approved foreign investment amount, and regularisation of such excess funds with post-facto approval from foreign investment approving entity.
- Non requirement of approval of foreign investment in case the investment has been made from earnings of industry, which has been already approved for foreign investment.
- Increasing ceiling of loans from parent company.
- Allowing all types of fees/charges associated with foreign loans, provided they are within the allowed interest ceiling.
- Increasing the tenure of NPR denominated loans with fixed interest rates.
- Allowing third party in foreign loans, without incurring any financial obligations.
- Allowing convertible types of foreign loans, which can be converted into equity on a later date.
- Allowing acceptance of bank guarantees issued by foreign banks in order to grant loans in Nepal, such that it promotes access to credit in climate/green financing, women entrepreneurship, SMEs sectors.
Conclusion
The recorded FDI realisation is disproportionately low compared to the committed amount. This disconnection between commitment and realisation necessitates a comprehensive review of existing policies and the introduction of targeted reforms to bridge this gap. Development finance institutions (DFIs) serve as a crucial pillar to support investments in financially viable private sector projects, thus, the priority to enhance the exposure of DFIs for contribution in sustainable impact.
Timsina is Deputy Governor of Nepal Rastra Bank
